Vanguard Digital Advisor Services (VDAS) Review: Only Slightly More Expensive Than Target Date Fund

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Updated. Vanguard has a new “robo-adviosr” product, Vanguard Digital Advisor Services (VDAS). Here is the new full PDF brochure. After reading through the entire brochure (again!), here are a few new things that I noticed:

Glide path is now more personalized. Instead of just having a single glide path for everything headed for retirement in the same year, VDAS will customize your asset allocation glide path depending on: your selected risk attitude, when you think you will retire, your assessed loss aversion (if any), marital status, if your portfolio has low or high single stock exposure, retirement savings rate, and expected retirement income.

Joint accounts with rights of survivorship are currently not allowed. This is expected to change in the future.

You may need to sell or move your existing investments first to enroll in VDAS. VDAS requires $3,000 specifically to be held in the Vanguard Federal Money Market Fund, which is their default cash sweep. In addition, your brokerage account can’t contain anything else. They want a clean slate of cash, and only then will they invest it for you. Most other robo-advisors don’t like to mix old assets either, but I expect that Vanguard will have a lot of potential customers with existing holdings. I was hoping they could somehow adjust for that.

Emergency savings goals. In the near future, you will be able to get guidance as to how much to set aside as emergency savings, and they’ll help manage that for you.

Here are the things I noted previously that still hold:

Key differences between the VDAS and VPAS:

  • Vanguard Personal Advisor Services (VPAS) – Both human and online communications. $50,000 minimum. 0.30% annual advisory fee (on top of ETF/fund expense ratios).
  • Vanguard Digital Advisor Services (VDAS). Online-only communication. $3,000 minimum for retail accounts ($5 minimum for 401k). Target 0.15% annual advisory fee (on top of ETF/fund expense ratios).

VDAS can work across multiple enrolled Vanguard accounts. (Eligible account types include: individual, joint accounts with rights of survivorship, traditional IRA, Roth IRA, 401(k), and Roth 401(k) accounts authorized by plan sponsors). If you have a Vanguard-managed 401k, you could then move your taxable and IRA balances over to Vanguard and have them manage everything together. Betterment and Wealthfront have a relatively tiny footprint in the 401k space. I suppose you could also just buy the same Target Retirement fund across all your accounts.

VDAS takes advantage of tax-efficient asset location, prioritizing tax-inefficient assets into IRAs and 401k plans. Wealthfront and Betterment will also do tax-efficient asset location, but again they are unlikely to manage your 401k so you’ll still have to do some work yourself. With an all-in-one Target Retirement fund, it’s the same everywhere and you can’t separate the stocks from the bonds.

VDAS will provide online financial planning tools where you enter your personal details to create a personalized, goal-based financial plan. Wealthfront, Betterment, and every other robo-advisor will do the same thing (using their own algorithms of course). These forward-looking charts are pretty to look at, but really it’s all just a big guess.

VDAS will only use these four Vanguard ETFs: Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, and Vanguard Total International Bond Index ETF. (401k accounts will be more flexible, working within the available investment options.) Retail accounts will not include any recommendations to purchase individual securities or bonds, CDs, options, derivatives, annuities, third-party mutual funds, closed-end funds, unit investment trusts, partnerships, or other non-Vanguard securities. When cash is recommended as part of the strategic asset allocation target (usually only for those close or in retirement), the Vanguard Prime Money Market Fund will be used.

That makes the basic ingredients of a VDAS portfolio the exact same as a Vanguard Target Retirement 20XX fund. It’s even possible that the asset allocation will be identical. However, it’s important to note for expense reasons (see below) that VDAS holds the cheapest ETF versions while the Target fund holds the most expensive Investor Shares.

VDAS is only about 0.05% more expensive than the equivalent Vanguard Retirement Fund. VDAS promises that the all-in fee (advisory + ETF expense ratios) will be 0.20% annually. Since the ETFs are only about 0.05%, that works out to a net advisory fee of 0.15%. Meanwhile, the all-in fee for the Vanguard Target Retirement fund currently varies from 0.15% to 0.12% because it holds the more expense Investor Shares of mutual funds. Vanguard has noted elsewhere that mutual funds are more expensive to maintain on their side, and so they charge more.

VDAS and VPAS both rebalance your portfolio within 5% bands. According to a previous article, VPAS checks your portfolio quarterly and then rebalances if a 5% threshold band is exceeded. According to this brochure, VDAS also rebalances only when an asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%. However, VDAS will check daily instead of quarterly. This isn’t a big deal to me, but an interesting difference to note. Rebalancing will be done in a tax-sensitive manner.

The Vanguard Target Retirement funds handle the rebalancing internally, and every other robo-advisor will have a similar rebalancing feature. Automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t.

VDAS will only buy Vanguard ETFs, which means they won’t be doing any ETF tax-loss harvesting with similar pair of ETFs. (The legality of that practice has yet to be tested in court if its use becomes widespread.)

VDAS will not buy fractional shares of ETFs. A minor note, but an increasing number of brokers offer fractional shares, like M1 Finance. This can be helpful if you invest in smaller amounts, for example via dollar-cost-averaging with each paycheck.

Fee comparisons. The VDAS 0.15% advisory fee is very competitive. It’s cheaper than the base offerings of Betterment and Wealthfront of 0.25%. Schwab’s Intelligent Portfolios says it is “free” but from a cash drag perspective the effective fee is an estimated 0.12% (others estimate 0.20%). Betterment and Wealthfront have the head start in terms of technology and a modern design interface, but can Vanguard close the gap?

I was a bit surprised at how little VDAS costs more than a Vanguard Target Retirement fund. I have been a fan of Vanguard Target Retirement funds because they are basically a robo-advisor rolled into a simple mutual fund. But why are they still so expensive?

As DIY person, I would remind folks that you can always buy the exact same ETFs at any low-cost broker. A new broker M1 Finance offers free commissions, free rebalancing, and fractional shares. Now you have the same portfolio at an all-in cost of 0.05%.

Bottom line. Vanguard Digital Advisor Services is definitely going to make a dent in the robo-advisor field. It’s simple and cheaper than many competitors. In addition, it is only slightly more expensive than Vanguard’s own target-date fund, with a low minimum starting balance.

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  1. I signed up for Blooom to robo-manage my Vanguard 401k at $10 per month. With the ~$350k balance I have, that looks like it’s significantly less expensive than this VDAS. Unless I’m missing something?

  2. Why is WiseBanyan always forgotten when talking about Robo Advisors? Its basic product is free with reasonable add-ons for a cost like tax loss harvesting. I have no affiliation with the company other than having an account there. Is there something I should be worried about or are they just the small player in the game?

  3. Yeah, I’m still not sold on it. With International equities and bonds, especially emerging market equities and bonds, being a huge drag on performance, I don’t think saving $5 on a $10,000 investment is going to make much of a difference.

  4. One potential difference to note is that the SEC filing for VDAS does seem to suggest that tax loss harvesting will be possibly enabled. This is different from VPAS, and it’ll be interesting to see if the harvesting is “continuous” like Wealthfront.

    • The vpas advisor I spoke with used tax loss harvesting as a selling point for the switch from admiral shares to ETFs, so it must be an option

  5. If VDAS checks the re-balancing opportunity daily, will it trigger a huge sell-off among all customer accounts at the same time? that sounds like a very bad idea.

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